“For my parents to be getting a 500K+ 25yr mortgage at age 62 with 51K income seems to me completely ridiculous and crazy. How could they have been pre-approved for this?”

“There’s been a recent development within my family that is causing me a lot of distress.  My parents are 62. My father takes in 40K after tax as he gets disability payments for the rest of his life and my mom does not work. They also take in 11K a year from renting out the basement of their Vancouver special which they bought in 1989 for 179K. On Friday, they told me they bought a 800K+ house in Burnaby using a 300K downpayment from a condo they sold in 2010. I don’t think the deal is final as they are getting a house inspector to look at the place on Monday. However, they claim they were preapproved for a 25 year mortgage. They plan to rent out the top suite to my brother, sister-in-law and their newboard for $1200 a month, and they also will rent out the basement suite.

To me, getting a 500K+ 25yr mortgage at age 62 with 51K income is just completely ridiculous and crazy, especially with the recent developments and current malaise of the market. They always spout the same nonsense about how house prices can’t go down, running out of land, house prices being propped up by mainland Chinese & drugs, Canadian banks more prudent than Americans.

So my question is how could they have been pre-approved for this mortgage 10x their income at age 62? It just seems impossible to me. Am I missing something or is there some loophole where a financial institution would actually lend this couple this much money? I am desperately trying to convince them not do this but this ‘can’t lose’ Vancouver real estate mentality is just too hard to break.”

tektite at VCI 24 Jun 2012 8:53pm [hat-tip ‘AP’]

31 responses to ““For my parents to be getting a 500K+ 25yr mortgage at age 62 with 51K income seems to me completely ridiculous and crazy. How could they have been pre-approved for this?”

  1. Ralph Cramdown

    I think this is the first time I’ve seen honest citizens feel entitled to their take from the illicit drug industry.

  2. Yes, banks will lend to them because there is little risk exposure for the banks.

    • And the banks will lend because they are (in essence) harvesting the writers future inheritance. That is what a mortgage to retirement age people with cash assets accomplishes in a falling market. The bank is nice and secure with such a healthy down payment, the old folks are indentured for the balance of their lives and the kids get screwed when much of the equity ultimately evaporates leaving little of the original kitty to be divvied up after the funeral costs are paid.

      (I am assuming this 62 year old couple who are already on DB might not even see 75 or whatever the average age of mortality is anymore)

      • Ralph Cramdown

        He can expect to live to 83, she to 86, not factoring in worse than normal health.

      • Pine boxes.

        You know, you have to sacrifice a bit to get in on the coffin ladder.

      • Many thanks Ralph. Boy we sure are long-lived these days. I am sort of surprised life expectancy has gone up so high so fast in this country and also by how much the difference between men and women has narrowed since I last studied it.

  3. Quite possibly the bank has taken both the new purchase and their current home as joint mortgage security ie. an interalia mortgage.

  4. I’m reminded of an unfortunate situation in my own family. When my dad passed away he left his children a stake in his paid-for Vancouver property. The catch? My stepmom gets to live there (in extreme comfort, I might add) for “up to” five years following his death. She must liquidate the property within this period, but she decides the timing.

    We’re now in Year 4. She refuses to list and, by all appearances, does not intend to until the very last possible moment. I’ve been diplomatically pointing out the financial risks that the estate is running by holding on to the property. Her response: utter silence. Siblings are clueless, saying things like, “Oh well, there’s no better investment than Vancouver RE anyway”. I believe my dad would have expected some action by now, particularly in light of market developments, and shudder to think his hard-earned patrimony is going up in smoke.

    • Ralph Cramdown

      You should convince the sibs to jointly make her an offer — buy her out, get her another place to live for two years, whatever.

      • I would offer to her to sell but a condition of sale that she would get a lease. You could even make it a 2 year lease so she could live there an extra year which might entice her to want to sell.

      • I think you missed the point, he/she wants to put the property on the market so they harvest all that equity and take advantage of these prices before they drop tremendously. Buying her out and renting to her wouldnt do that, plus she doesnt own the home, the fathers estate/beneficiaries do. She just lives there rent free for max of 5 years.

    • Probably because she has no place to go if she does sell. I assume your father didnt make any financial arrangements for her when he died? She has no reason to sell if she cant afford another place. Also selling benefits you not here, hence she doesnt want to hear what you have to say, cause its a biased point of view.

      • Arshes: my father made ample financial arrangements for her; she can most definitely afford to move to another place. And selling does benefit her, as she also has a share in the property.

    • I would cut her in for 10% plus moving allowance and make it quick. You will likely lose more by waiting and there may in fact be no market whatsoever by the time a year goes by.

      What I mean by that is this….just because average prices drop by 30 or 40% in the next couple of years does not mean that all properties will participate in the action.

      Just watch. I have seen this before. Average declines are representing the average. The facts are that to get an actual sale your price might have to be 50% or more because buyers will be scarce, feature deals will be common and great locations will come at a good discount.

      The guys who sharpen up their pencils will win. You have got to get out early or accept being stuck with a home that can only invite bids following significant price declines.

      Unless your place is really special……………is it special?

      • Farmer, thanks for your thoughts. She holds a 1/3 stake in the property, so she has skin in the game already. The issue is getting her to grasp the risks of delaying the sale. I’ve used every argument, every line of reasoning. I’ve even suggested she might sell the place and rent it back from the owner–thus taking risk off the table without sacrificing her standard of living. Heck, with the interest earned on her portion of the sale proceeds, plus the thousands saved in foregone strata fees and taxes, she could afford to rent something awesome.

        And still, it just doesn’t compute. Partly it’s financial ignorance. And partly it’s that she’s living very comfortably and, deep down, probably resents having to sell, move, and surrender some of the capital from the property (even though the $ was earned by my dad, and it was his will that it be shared). I’m with you re: averages, and know that in a year’s time we could be in no man’s land…

  5. I guess this is a good example of the lengths some parents will go to help out their children – especially ones with newborns.

    • Define “help”.

      • “They plan to rent out the top suite to my brother, sister-in-law and their newboard for $1200 a month”

        it looks like these parents bought a home for their son and family. Sounds like a “rent to own” situation to me.

      • Sounds like a recipe for ‘intergenerational wealth destruction’ to me.
        Leverage up equity held in RE to buy more RE. On the way down, far more equity destroyed (in some cases all!) than if they’d sat pat.
        Similar situations featured in other recent anecdotes.

      • And once the kids are hooked on what looks like a deal they are trapped. The guilt of walking away from a bad situation followed by the resentment of not toughing it out when the chips are down will rip the heart right out of the family.

        Intergenerational wealth destruction. What a perfect term for this insanity. Nobody walks away a winner.

  6. The only way the parents might be of help is to charge them below-market rent. If so, their property is in all likelihood cash-flow negative. That means they’re banking exclusively on price gains. And if such gains fail to materialize? My prediction: they could end up leaving their kids a smaller inheritance than they otherwise would or, at worst, an underwater mortgage. Some help.

  7. July 4th, REBGV:

    Spring activity remains balanced in the Greater Vancouver housing market
    Home

    http://www.rebgv.org/news-statistics/spring-activity-remains-balanced-greater-vancouver-housing-market-0

    *Editor’s Note: Benchmark prices underwent a re-calculation this month in order to more accurately reflect trends measured by the MLS® Home Price Index. There were no changes to the calculation of index values

  8. The loan is solid for the bank. If anything goes wrong, the bank will happy take possession of the paid-for Vancouver Special.

  9. Housing market gone mad. Banks take advantage of passing the risk to CMHC (people of Canada). Day or reckoning is here, won’t be pretty!

  10. I went through the same thing with my mother in 1999 with mutual funds. I begged, pleaded, cajoled, and finally bellowed with exasperation over the phone, but she wouldn’t budge. Her investment “adviser” (i.e. mutual fund pimp) told her that there was no evidence of a tech stock bubble and he had been assured by the “company’s analysts” that the market would continue to go up. Fast-forward 18 months, Mom & Dad lost a pile of money. To this day, they haven’t come close to earning it back.

    The moral of this boring and poorly-written anecdote? There is likely nothing this guy can do. His parents have been convinced by the “experts” over at the bank, or maybe their friendly local real estate agent (who’s the son of their good friends, and such an impressive and knowledgeable young man!) and their own family’s opinion on the matter will not sway them. Been there.

  11. Stories like this make me really worry for the future of Canada. A fall in real estate prices will be a financial disaster for many families as several have doubled down. This whole children / nesting etc. urge we have to buy real estate really will get this country into the same place as our cousins to the south. Why would we be any different? (please don’t answer that with the usual list which has only 50% merit)

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